SunFirst Bank, Saint George, Utah, Finally Closed By Regulators

The Utah Department of Financial Institutions closed SunFirst Bank, Saint George, Utah, and appointed the FDIC as receiver. The FDIC entered into a purchase and assumption agreement with Cache Valley Bank, Logan, Utah, under which Cache Valley will assume most of the deposits of SunFirst Bank. The FDIC will retain $15 million in deposits that were previously frozen due to litigation involving SunFirst Bank.

Struggling SunFirst Bank has been under increased regulatory scrutiny for several years. In October 2009, the FDIC issued a cease and desist order to SunFirst Bank citing numerous “unsafe and unsound banking practices” as detailed below.

(a) operating with management whose policies and practices are detrimental to the Bank;
(b) operating with a board of directors which has failed to provide adequate supervision over and direction to the active management of the Bank;
(c) operating with inadequate capital in relation to the kind and quality of assets held by the Bank;
(d) operating with an inadequate loan valuation reserve;
(e) operating with a large volume of poor quality loans;
(f) operating in such a manner as to produce operating losses; and
(g) operating with inadequate provisions for liquidity.

Considering the weak capital position of SunFirst and the litany of serious operating and management deficiencies, this bank should have been closed by regulators two years ago. Management operated SunFirst Bank with utter disregard to sound banking practices and made speculative loans with federally insured deposits.

Meanwhile, the FDIC issued meaningless enforcement actions and allowed SunFirst to continue operating even as the Bank’s default rate soared in late 2008. During the height of the real estate boom, SunFirst had aggressively lent money to land speculators and developers who quickly defaulted when property values declined. SunFirst is the first banking failure in Utah since March 2010, indicating that Bank management and not macroeconomic conditions were the cause of its failure.

In a desperate attempt to raise additional capital after the FDIC cease and desist order, SunFirst entered into an arrangement with St. George businessman Jeremy Johnson in late 2009 to process online poker payments. Over the next year, SunFirst processed over $200 million for online poker operators which eventually lead to a federal indictment in April 2011 of SunFirst Vice Chairman John Campos.

Jeremy Johnson faces criminal charges for mail fraud related to an online company he ran known as iWorks. The Federal Trade Commission alleges that Johnson defrauded iWorks customers to the tune of $275 million. An explanation from regulators on how they failed to notice SunFirst’s involvement in a criminal enterprise involving online poker payments would make interesting reading. The charges in the cease and desist order issued by the FDIC shortly before SunFirst decided to start processing online poker funds made it abundantly clear that bank management had little regard for safe and sound banking practices and regulators knew it.

At September 30, 2011, SunFirst had total deposits of $169.1 million and total assets of $198.1 million. Cache Valley Bank agreed to purchase only $177.3 million of SunFirst’s assets, leaving the FDIC stuck with the balance. Cache Valley Bank entered into a loss-share transaction with the FDIC which will limit future losses on the asset pool purchased. The FDIC maintains that the use of loss-share transactions minimizes losses on failed bank assets by keeping them in the private sector.

This is the second acquisition of a failed bank by Cache Valley Bank. In May 2009, Cache purchased failed America West Bank of Layton, Utah.

The loss on the failure of SunFirst Bank is $49.7 million. SunFirst Bank is the nation’s 87th banking failure this year and the first in Utah.